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The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the

The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

Total Dirt Bikes

Mountain

Bikes

Racing Bikes
Sales $ 918,000 $ 264,000 $ 401,000 $ 253,000
Variable manufacturing and selling expenses 470,000 115,000 201,000 154,000
Contribution margin 448,000 149,000 200,000 99,000
Fixed expenses:
Advertising, traceable 69,600 8,400 40,900 20,300
Depreciation of special equipment 43,200 20,400 7,500 15,300
Salaries of product-line managers 114,600 40,200 38,300 36,100
Allocated common fixed expenses* 183,600 52,800 80,200 50,600
Total fixed expenses 411,000 121,800 166,900 122,300
Net operating income (loss) $ 37,000 $ 27,200 $ 33,100 $ (23,300)
*Allocated on the basis of sales dollars.

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:
1a.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b. Should production and sale of the racing bikes be discontinued?
Yes
No

2a. Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

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